The Philadelphia Semiconductor Index shows strong seasonal characteristics at this time of year. Investors can take advantage by investing in the appropriate exchange traded fund.
The Semiconductor Index has two important seasonal trends between now and the end of the year. The index has recorded an average loss per period of 8.0 per cent from mid-August to mid-October and an average gain per period of 11.5 per cent from mid-October to mid-January during the past 15 periods. Seasonal trends are influenced by a slowdown in demand for semiconductor chips in late summer followed by a surge in demand in the fourth-quarter related to purchases of consumer electronic goods for Christmas. The index has a history of peaking at least briefly at the end of the first week in January when the last of a series of good news events are announced at the Las Vegas Consumer Electronic show.
This year, history is expected to repeat itself. Several key consumer electronic products are scheduled for launch late this fall prior to the Christmas buying season. Notable is the iPhone 5. However, tablet, electronic game and smart phone manufacturers are planning to launch new products with extensive marketing programs before the end of the year. Consumers likely will hold back purchases in the third-quarter prior to launch of new products in the fourth-quarter.
Four exchange traded funds (ETFs) are available for investment in the sector. Each has unique characteristics. Each ETF holds a basket of shares in companies that design, distribute, manufacture and sell semiconductors.
By far the most actively traded ETF in the sector is Semiconductor HOLDRS . Units track the performance of 18 well known international semiconductor stocks. The portfolio is capitalization weighted and the management expense ratio is zero. A word of caution! The portfolio is heavily concentrated in Intel, Texas Instruments and Applied Materials. Together, their weight in the portfolio is 52 per cent.
PHLX SOX Semiconductor Sector Index Fund Holdings holds 52 securities that track the Philadelphia Semiconductor Index. The portfolio is capitalization weighted. Its largest holdings are Intel, Broadcom, Applied Materials, Texas Instruments and Altera and its management expense ratio is 0.48 per cent.
The SPDR Semiconductor ETF holds 63 securities in the industry. Holdings in the portfolio essentially are equally weighted and rebalanced over time. The management expense ratio is 0.35 per cent.
The Dynamic Semiconductor ETF also is a capitalization weighted ETF with 31 holdings. The largest holdings are Qualcomm, Altera, KLA Tencor, Analog Devices and Texas Instruments and its management expense ratio is 0.60 per cent.
On the charts, the Philadelphia Semiconductor Index has a negative technical profile and the intermediate trend is down. The Index trades below its 50 and 200 day moving averages. Strength relative to the S&P 500 Index has been negative since the beginning of May. Short-term momentum indicators currently are oversold and showing early signs of bottoming.
The preferred strategy is to invest in an appropriate ETF in the sector when technical parameters turn positive in October for a seasonal trade ending in early January.
Don Vialoux is the author of a free daily report on equity markets, sectors, commodities and Exchange Traded Funds. He also is a research analyst for JovInvestment Management Inc. Reports are available at www.timingthemarket.ca Follow us on www.Twitter.com/EquityClock